Norma Walton: How Much is Enough?

North American society promotes the concept that having money creates happiness.  Certainly having enough wealth to cover your basic needs is important – a roof above your head, sufficient money for food, a clean supply of water, basic clothing and a healthy environment.  A lack of those essentials will create misery.

money happiness

Once you achieve the above, there is value in considering how much more money you need.  Beyond covering your basic needs, below are some reasonable objectives that you may want to consider when you decide how much money you require:

  1. A reasonable spending plan: Charles Dickens proposed the theory that if your income is $100 per day and you’re spending $99, you will be happy.  If your income is $100 per day and you’re spending $101, you will be miserable.  That is wise advice.  If your expenses exceed your income, you will be constantly scrambling to cover your bills and will head into debt, which is stressful.  Focusing on reducing your expenses or increasing your income so that your income is greater than your expenses is time well spent.
  2. A plan to pay off existing debt: My grandparents’ generation saved their money before they would buy a car.  They saved their money to fund their vacation.  They paid off their mortgage as soon as they reasonably could and would have considered it baffling to refinance to pull out wealth from their house.  Debt often causes stress and tension in your life.  Debt sometimes makes you feel out of control of your financial situation.  Hence a focus on paying off debt will permit you to enjoy your money more as you pay the debt down.

    3d people - human character person carrying word "debt" on his back. Debt concept. 3d render
    3d people – human character person carrying word “debt” on his back. Debt concept. 3d render
  3. An emergency fund or line of credit: If you were to lose your job, do you have enough money to survive until you find a new one?  For some this amount will be one year’s worth of income savings; for others this amount will be a month or two.  It is prudent to have some money available if something happens that impacts your ability to earn an income for a period of time.
  4. A retirement fund: The Canadian banks focus on retirement planning.  They sit down with their customers to discuss how much you would need to save to fund a comfortable retirement.  They create charts and objectives for savings to try to get people thinking about where they want to be when they are ready to retire.  This is a good exercise for most people and helps people set goals for savings and calibrates their financial expectations for when they finish working.
  5. An insurance policy to provide for your dependants: If you were hit by a bus today, who would be in trouble without you around?  Think about the financial needs of your dependants and ensure that you have term life insurance in a sufficient amount to cover those needs.  Once you no longer have dependants who need your income to survive, you can reduce or eliminate that insurance.

piggy bank

Once you turn your mind to how much money is enough for you, you can review the above items and create a plan to ensure you have what you need.

Brave Old World: Market Cycle Investment Management

The Market Cycle Investment Management (MCIM) methodology is the sum of all the strategies, procedures, controls, and guidelines explained and illustrated in the “The Brainwashing of the American Investor” — the Greatest Investment Story Never Told.

Most investors, and many investment professionals, choose their securities, run their portfolios, and base their decisions on the emotional energy they pick up on the Internet, in media sound bytes, and through the product offerings of Wall Street institutions. They move cyclically from fear to greed and back again, most often gyrating in precisely the wrong direction, at or near precisely the wrong time.

MCIM combines risk minimization, asset allocation, equity trading, investment grade value stock investing, and “base income” generation in an environment which recognizes and embraces the reality of cycles. It attempts to take advantage of both “fear and greed” decision-making by others, using a disciplined, patient, and common sense process.

This methodology thrives on the cyclical nature of markets, interest rates, and economies — and the political, social, and natural events that trigger changes in cyclical direction. Little weight is given to the short-term movement of market indices and averages, or to the idea that the calendar year is the playing field for the investment “game”.

Interestingly, the cycles themselves prove the irrelevance of calendar year analysis, and a little extra volatility throws Modern Portfolio Theory into a tailspin. No market index or average can reflect the content of YOUR unique portfolio of securities.

The MCIM methodology is not a market timing device, but its disciplines will force managers to add equities during corrections and to take profits enthusiastically during rallies. As a natural (and planned) affect, equity bucket “smart cash” levels will increase during upward cycles, and decrease as buying opportunities increase during downward cycles.

MCIM managers make no attempt to pick market bottoms or tops, and strict rules apply to both buying and selling disciplines.

NOTE: All of these rules are covered in detail in “The Brainwashing of the American Investor” .

Managing an MCIM portfolio requires disciplined attention to rules that minimize the risks of investing. Stocks are selected from a universe of Investment Grade Value Stocks… under 400 that are mostly large cap, multi-national, profitable, dividend paying, NYSE companies.

LIVE INTERVIEW – Investment Management expert Steve Selengut Discusses MCIM Strategies – LIVE INTERVIEW

Income securities (at least 30% of portfolios), include actively managed, closed-end funds (CEFs), investing in corporate, federal, and municipal fixed income securities, income paying real estate, energy royalties, tax exempt securities, etc. Multi level, and speculation heavy funds are avoided, and most have long term distribution histories.

No open end Mutual Funds, index derivatives, hedge funds, or futures betting mechanisms are allowed inside any MCIM portfolio.

All securities must generate regular income to qualify, and no security is ever permitted to become too large of a holding. Diversification is a major concern on an industry, or sector, level, but global diversification is a given with IGVSI companies.

Risk Minimization, The Essence of Market Cycle Investment Management

Risk is compounded by ignorance, multiplied by gimmickry, and exacerbated by emotion. It is halved with education, ameliorated with cost-based asset allocation, and managed with disciplined: selection quality, diversification, and income rules— The QDI. (Read that again… often.)

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires daily decision-making. Risk management requires security selection from a universe of securities that meet a known set of qualitative standards.

The Market Cycle Investment Management methodology helps to minimize financial risk:

  • It creates an intellectual “fire wall” that precludes you from investing in excessively speculative products and processes.
  • It focuses your decision making with clear rules for security selection, purchase price criteria, and profit-taking guidelines.
  • Cost based asset allocation keeps you goal focused while constantly increasing your base income.
  • It keeps poor diversification from creeping into your portfolio and eliminates unproductive assets in a rational manner.

Strategic Investment Mixology – Creating The Holy Grail Cocktail

So what do your Investment Manager and your neighborhood bartender have in common, other than the probability that you spend more time with the latter during market corrections?

Antoine Tedesco, in his “The History of Cocktails“, lists three things that mixologists consider important to understand when making a cocktail: 1) the base spirit, which gives the drink its main flavor; 2) the mixer or modifier, which blends well with the main spirit but does not overpower it; and 3) the flavoring, which brings it all together.

Similarly, your Investment Manager needs to: 1) put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making; 2) use a well defined and consistent investment methodology that fits well with the plan without leading it in tangential directions; and 3) exercise experienced judgment in the day-to-day decision making that brings the whole thing together and makes it grow.

Tedesco explains that: new cocktails are the result of experimentation and curiosity; they reflect the moods of society; and they change rapidly as both bartenders and their customers seek out new and different concoctions to popularize. The popularity of most newbies is fleeting; the reign of the old stalwarts is history — with the exception, perhaps, of “Goat’s Delight” and “Hoptoad”. But, rest assured, the “Old Tom Martini” is here to stay!

It’s likely that many of the products, derivatives, funds, and fairy tales that emanate from Modern Portfolio Theory (MPT) were thrown together over “ti many martunies” at Bobby Van’s or Cipriani’s, and just like alcohol, the addictive products created in lower Manhattan have led many a Hummer load of speculators down the Holland tubes.

The financial products of the day are themselves, created by the mood of society. The “Wizards” experiment tirelessly; the customers’ search for the Holy Grail cocktail is never ending. Curiosity kills too many retirement “cats”.

Investment portfolio mixology doesn’t take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment cocktail together without the risk of addictive speculations, or bad after- tastes, is a valuable talent worth finding or developing for yourself. The starting point should be a trip to portfolio-tending school, where the following courses of study are included in the Investment Mixology Program:

Understanding Investment Securities: Investment securities can be divided into two major classes that make the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate profits in the form of capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, royalties, rents, etc.

All investment securities involve both financial and market risk, but risk can be minimized with appropriate diversification disciplines and sensible selection criteria. Still, regardless of your skills in selection and diversification, all securities will fluctuate in market price and should be expected to do so with semi-predictable, cyclical regularity.

Planning Securities Decisions: There are three basic decision processes that require guideline development and procedural disciplines: what to buy and when; when to sell and what; and what to hold on to and why.

Market Cycle Investment Management: Most portfolio market values are influenced by the semi-predictable movements of several inter-related cycles: interest rates, the IGVSI, the US economy, and the world economy. The cycles themselves will be influenced by Mother Nature, politics, and other short-term concerns and disruptions.

Performance Evaluation: Historically, Peak-to-Peak analysis was most popular for judging the performance of individual and mutual fund growth in market value because it could be separately applied to the long-term cyclical movement of both classes of investment security. More recently, short-term fluctuations in the DJIA and S & P 500 are being used as performance benchmarks to fan the emotional fear and greed of most market participants.

Information Filtering: It’s important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced manager’s skill set. There is too much information out there, mostly self-motivated, to deal with in the time allowed.

Wall Street investment mixologists promote a cocktail that has broad popular appeal but which typically creates an unpleasant aftertaste in the form of bursting bubbles, market crashes, and shareholder lawsuits. Many of the most creative financial nightclubs have been fined by regulators and beaten up by angry mobs with terminal pocketbook cramps.

The problem is that mass produced concoctions include mixers that overwhelm and obscure the base spirits of the investment portfolio: quality, diversification, and income.

There are four conceptual ingredients that you need to siphon out of your investment cocktail, and one that must be replaced with something less “modern-portfolio-theoryesque”:

1) Considering market value alone when analyzing performance ignores the cyclical nature of the securities markets and the world economy.

2) Using indices and averages as benchmarks for evaluating your performance ignores both the asset allocation of your portfolio and the purpose of the securities you’ve selected.

3) Using the calendar year as a measuring device reduces the investment process to short-term speculation, ignores financial cycles, increases emotional volatility in markets, and guarantees that you will be unhappy with whatever strategy or methodology you employ —most of the time.

4) Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually causes hair loss and shortness of breath.

And the one ingredient to replace: Modern Portfolio Theory (the heartbeat of ETF cocktails) with the much more realistic Working Capital Model (operating system of Market Cycle Investment Management).

Cheers!

The “Total Return” Shell Game

No “Interest Rate Sensitive” Security is an Island…

Just what is this “total return” thing that income portfolio managers like to talk about, and that Wall Street uses as the performance hoop that all investment managers have to jump through? Why is it mostly just smoke and mirrors?

Here’s the formula:

  • Total Income + (or -) Change in Market Value – Expenses = Total Return — and this is supposed to be the ultimate test for any investment portfolio, income or equity.

Applied to Fixed Income Investment Portfolios, it is useless nonsense designed to confuse and to annoy investors.

How many of you remember John Q. Retiree? He was that guy with his chest all puffed up one year, bragging about the 12% “Total Return” on his bond portfolio while he secretly wondered why he only had about 3% in actual spending money.

The next year he’s scratching his head wondering how he’s ever going to make ends meet with a total return that’s quickly approaching zero. Do you think he realizes that his actual spending money may be higher? What’s wrong with this thinking? How would the media compare mutual fund managers without it?

Wall Street doesn’t much care because investor’s have been brainwashed into thinking that income investing and equity investing can be measured with the same ruler. They just can’t, and the “total return” ruler itself would be thrown out with a lot of other investment trash if it were more widely understood.

  • If you want to use a ruler that applies equally well to both classes of investment security, you have to change just one piece of the formula and give the new concept a name that focuses in on what certainly is the most important thing about income investing — the actual spending money.

We’ll identify this new way of looking at things as part of “The Working Capital Model” and the new and improved formulae are:

  • For Fixed Income Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!
  • For Equity Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!

Yes, they are the same! The difference is what the investor elects to do with the spending money after it has become available. So if John Q’s Investment pro had taken profits on the bonds held in year one, he could have sent out some bigger income payments and/or taken advantage of the rise in interest rates that happened in year two.

Better for John Q, sure, but the lowered “total return” number could have gotten him fired. What we’ve done is taken those troublesome paper profits and losses out of the equation entirely. “Unrealized” is “un-relevant” in an investment portfolio that is diversified properly and comprised only of investment grade, income producing securities.

Most of you know who Bill Gross is. He’s the fixed Income equivalent of Warren Buffett, and he just happens to manage the world’s largest “open ended” bond mutual fund. How was he investing his own money during other interest rate cycles?

Well, according to an article by Jonathan Fuerbringer in the Money and Business Section of January 11, 2004 New York Times, he’s removed it from the Total Return Mutual Fund he manages and moved it into: Closed End Municipal Bond Funds where he could “realize” 7.0% tax free.

(Must have read “The Brainwashing of the American Investor”.)

He doesn’t mention the taxable variety of Closed End Fund (CEF), now yielding a point or two more than the tax free variety, but they certainly demand a presence in the income security bucket of tax-qualified portfolios (IRAs, 401k(s), etc.).

Similarly, the article explains, Mr. Gross advises against the use of the non investment grade securities (junk bonds, for example) that many open-end bond fund managers are sneaking into their portfolios.

But true to form, and forgive the blasphemy if you will, Mr. Gross is as “Total Return” Brainwashed as the rest of the Wall Street institutional community — totally. He is still giving lip service validity to speculations in commodity futures, foreign currencies, derivatives, and TIPS (Treasury Inflation Protected Securities).

TIPs may be “safer”, but the yields are far too dismal. Inflation is a measure of total buying power, and the only sure way to beat it is with higher income levels, not lower ones. If TIPS rise to 5%, REITS will yield 12%, and preferred stocks 9%, etc.

No interest rate sensitive security is an Island!

As long as the financial community remains mesmerized with their “total return” statistical shell game, investors will be the losers.

  • Total Return goes down when yields on individual securities go up, and vice versa. This is a good thing.
  • Total Return analysis is used to engineer switching decisions between fixed income and equity investment allocations, simply on the basis of statements such as: “The total return on equities is likely to be greater than that on income securities during this period of rising interest rates.”

You have to both understand and commit to the premise that the primary purpose of income securities is income production. You have to focus on the “Income Received” number on your monthly statement and ignore the others… especially NAV.

If you don’t agree with the next three sentences; if they don’t make complete sense: you need to learn more about Income Investing:

  • Higher interest rates are the income investor’s best friend. They produce higher levels of spending money.
  • Lower interest rates are the income investor’s best friend. They provide the opportunity to add realized capital gains to both the total spending money and total working capital numbers.
  • Changes in the market value of investment grade income securities, Yogi says, are totally and completely irrelevant, 97% of the time.

Year End Review 2014 and 2015 Preview

Let’s Talk About the Market Numbers…

Note that this report pertains most directly to portfolios operated under the guidelines, rules, and disciplines of Market Cycle Investment Management (MCIM). MCIM produces disciplined “High Quality Growth & Income Portfolios”, designed to maintain and/or to grow income regardless of the direction taken by markets or interest rates.

———————————————————-

Both markets have been good to MCIMers this year: Investment Grade Value Stock Index (IGVSI) equities produced plenty of profits and dividend income, while the income Closed End Funds (CEFs) produced much higher yields than many “experts” would admit even exist… and occasional profits.

On the negative side, new equity investment opportunities were scarce, and many income CEFs reduced their payouts slightly, reflecting more than six years of historically low interest rates. I suspect that both conditions will be reversed soon.

A recent (unaudited) review of known MCIM “Working Capital” produced some interesting numbers, even without including year end dividends:

• Roughly 35% of total realized income was disbursed
• Nearly 25% of growth purpose capital remained in “smart cash” reserves for scheduled disbursements… and anticipated lower prices on equities. (Smart cash comes from income and profits)
• Roughly 65% of total earnings was reinvested in new and old securities
• New “Working Capital” was produced at a rate somewhere between 9% and 10%
• Less than 20% of investors made additions to investment programs, eschewing income yields in excess of 6%
• None ot selected MCIM portfolios lost Working Capital… even after culling “poorest performers” throughout the year.

Working Capital” (total cost basis of securities + cash) is a realistic performance evaluation number…. it doesn’t shrink either during corrections or as a result of spikes in interest rates. It continues to grow so long as dividends, interest, profits and deposits exceed realized losses and disbursements.

Using the “Working Capital Model” facilitates preparation for future income needs with every decision made throughout the history of an investment program… MCIM working capital grows every month, regardless of changes in market value, so long as the investor disburses less than the portfolio is producing.

Year end is always a good time for investors to review asset allocation and projected income needs… if you are over 50 and haven’t considered the subject, it’s time to do so. If you expect to start withdrawing from your portfolios in the next few years, you need to determine if asset allocation changes are necessary.

If your income allocation is not generating at least 6% in spending money, or 401k balances are subject to shrinkage when the stock market corrects, it’s time to deal with these problems.

If you are not taking advantage of 6%+ tax free yields (and a higher range in taxable CEFs), you owe it to yourself to investigate the opportunities.

<<>>                 <<>>                 <<>>

So is there a “Grinch” in your 2015 portfolio performance future? What’s likely to happen?

The Stock Market is about to finish 2014 at the highest year end number ever recorded, and with each new “ATH”, the likelihood of a market correction increases… this 6.75 year rally is the longest, broadest, and most stubborn in stock market history.

So long as income investors are abused with artificially low rates, a gradual reduction in yields is likely to hold income CEFs around current prices… higher future rates are already anticipated in current market values.

Once higher rates become reality, there are several reasons why CEF prices should firm and, over the longer term, rise, with increased income production…

But even if the correction starts tomorrow, what has nearly 40 years of financial history taught us about the MCIM “much-higher-quality-and-income-than-any-other-form-of-investment-portfolio” methodology?

The IGVSI universe, high quality ADRs, REITS, MLPs, Royalty Trusts, plus Equity and Income CEFs should logically have been expected to fare better than the stock market averages during the three financial crises of our lifetimes. Many MCIM users can attest to this, but the logic is clear.

Every security produces income, and reasonable profits are always realized. New equity investments are only made when prices have fallen 20% or more; income securities are added to at lower prices to reduce cost basis and increase yield. Not to mention the fact that MCIMers invest only in the highest S & P quality ranked companies, filtered further by dividend history, NYSE, and profitability.

MCIM users were low on equities in August 1987 but fully invested by November; they owned no mutual funds, no NASDAQ securities, and no IPOs in 1999; they lost virtually no working capital, reinvested all earnings, and rebounded quickly from the financial crisis.

Most investors, particularly Mutual Fund owners and 401k participants were blindsided, not once, but on all three occasions. The S & P 500 has gained only 3% per year in the 15 it has taken to get to its current level!

So if the rally continues, Working Capital growth will continue right along with it. But when the correction comes along, cash reserves and continued income will likely be available to takes advantage of new opportunities that arise in the MCIM select group of potential investment securities.

The longer the correction (the financial crisis took roughly 20 MCIM months to reach bottom on March 9 2009), the more Working Capital will be available when the next round of stock market all time highs is upon us.

And again, most importantly I believe, all programmed income payments will be made on time and without dipping into capital…

401k Drawdown… OMG

“Drawdown” has become the most feared word in the 401k vocabulary, just as “Total Return” has become the most worshipped phrase. OMG, how will plan participants be able to retire if their portfolio market values stop rising!

“Well, yeah,” you might say, “isn’t that what investing is all about. If you’re in the right sectors and the right funds, your drawdown will be minimized.” Well , yeah, that could be a viable drawdown minimization scenario if we had a crystal ball that could identify the “right” vehicles.

We don’t, and a litany of supportive sector correlation statistics just doesn’t change the basic facts of investment life that still are referred to respectfully by some as the “Market Cycle”.

Can you remember how easy portfolio management once was, simply by applying basic “QDI” principles to portfolio content selection and profit taking disciplines? It was a time when navigating an investment portfolio through the unpredictable, cyclical, undulations was indeed, a labor of love and respect for economic fundamentals… with strategies based on cyclical realities.

MPT charlatans, with “Frankensteinian” creativity, have transformed text-book-defined speculation into a passive sector-timing process based on probabilities… games of chance yet to be tested through any form of market correction.

In a program with no promise of income and no concern for fundamentals, is it any wonder market value drawdown is so feared.

Place today’s ETF and Mutual Fund equity content into the three Major Meltdowns of the past 30 years, and it’s likely that you’ll see the very same drawdown numbers… or worse, because of the artificial demand for a finite supply of real securities.

Drawdown happens; corrections are inevitable. The same MPT hocus pocus that, theoretically, is placing 401k dollars in the right sectors is, perversely, exacerbating the problem by blowing up the highest security price balloon ever, even higher.

Keep in mind as well, advisors and fiduciaries all, while we wonder at the brilliance of those who have created this ethereal (surreal), market fantasy land, that it is they (not you and I) that wield the fatal “pin”.

When the bubble bursts, remember these thoughts:

Drawdown minimization is accomplished by: investing only in “investment grade”, high quality, securities (fundamentally speaking); then diversifying among them sensibly within two “purpose delimited” security buckets; and regarding realized “base income” as the primary purpose of the income allocation and the secondary purpose of the equities.

With strict buy, hold, and reasonable profit-taking disciplines governing portfolio operations, drawdown minimization, continual income growth, and rapid recovery is virtually a sure thing… a sure thing that isn’t possible in a 401k environment that has kicked fundamental quality and income growth principles to the curb.

Retirement Preparation 101

Prompted by a recent article in “Financial Planning” entitled “For Retirement Portfolios, a Smarter Glidepath”… several points in the referenced “conventional wisdom” have fingernails on chalkboard quality.

The use of “stocks” in retirement to help with portfolio growth and to keep up with inflation is the first. The main thrust of a retirement program is (should be, anyway) the generation of income… closed end income funds do this better (and historically safer) than anything else.

If there is enough income (defined as more than the retiree needs for regular monthly expenses), the transition to retirement can be easy without ever being overly concerned with market value.

If a retiree spends a max 70% of the dividend and interest (“base”) income, it’s easy to grow both the portfolio market value (which you can’t spend) and the income (which you can)… thus keeping up with inflation, something we haven’t been allowed to see a glimpse of for years.

Only when there is enough income should equities even be considered in a retirement portfolio. Stocks have nothing whatsoever to do with inflation … a measure of buying power. More income dollars = more buying power. More market value tends only to encourage excessive spending.

Another myth is “today’s low interest rate environment”… totally not true in the land of income CEFs and even some income ETFs… tax free CEFs are paying (they have been for years) over 6% on average, with taxable funds paying much more.

A retirement “glide path” that increases equity exposure “to improve total return outcomes” is another dose of illogic that stems from the idea that the market price of income securities is even more important than the income the securities produce.

It just ain’t so… ever. Take the example of the financial crisis. Investors who held income CEFs (particularly the tax exempt variety) never saw a change in spending money, while the reinvestment of the “at least 30% of the income” rule mentioned above allowed them to add to their holdings… growing yield, growing income, and reducing cost basis per share.

The problem is that the search for the holy (market value) grail makes pre-retirement investors forget the purpose of their retirement portfolios (i.e., it’s the income, not the market value).

The problem this market value, total return, focus brings to the 401k space is the millions of pre-retires, appendages crossed, genuflecting frequently, praying that their market value will be stable. Somehow their standard of living will be maintained with realized income in 2% to 3% range… so let’s add more stocks, the article suggests, because they will go up in price better than income securities.

My hope is that the vast majority of Financial professionals will reject this lunacy… no matter how you slice it, higher, even stable, market value may float your boat, but it won’t produce the income needed to run it.

A wise man once defined true wealth, not as the ability to accept financial risk, but as the ability not to need to. Wise men in the 401k 3(38) fiduciary space can be found at Expand Financial and QBox Fiduciary Solutions.

What Must Be True For A Plan To Work?

In developing a plan to attach financial parameters to your life plan, at some point you must begin a success algorithm.  

A process that studies your wishes and resources and then asks a simple question. What must be true for this to play out as I wish?  How long must I live?  How long must I work?  How much must I save?  What yield must I have?

Fair answers to this question will lead to a better process.   Find conflicts,  discover tactics, assess risks, learn about yourself,  learn about your family.   Maybe even find the must “must have.”   Like staying alive and well for x years.

All assumptions are just that.  Assumptions.  Just because they fit does not mean they will occur.  Assessing which of them “must” happen if the plan is to happen, is a crucial step.

Once the must happen parts are organized, insured, eliminated from the list or accepted as risk, move to the next step of dealing with them and the other conditions.

Introduce reality.  Find some tactics that can address the plan.  If there are many choices for a particular step, then choose.  If no tactic appears or the ones there are unavailable to you, then refine and revise that aspect of the plan to eliminate the need to deal with it.

Put the first iteration of the plan into action.  Notice areas that are not smooth or when exposed to reality, behave differently. Modify a little and let it run for long enough to learn from its shortcomings.  This observe – reassess – perfect process, will remain for all time.  Be sure it is built in.

The observe – reassess – perfect process is the “I have seen this happen, what now?” part.  You must pay attention or you may miss it.

As you go along you will find that there are parts of you that heretofore have been obscure.  How much risk is okay for me?  How much margin for error do I need?  How much time can I spend on this?  Does my spouse have the same guidelines?  Do I change as I grow older?  Am I able to adapt easily?

Find the tools that can overcome some of your shortcomings and find some that can productively assist you in reaching your goals.  Personal attributes that make plans work in the long run are objectivity, time, liquidity, support, optimism, options and decisiveness.

Planning is not especially difficult, but it is detailed for a while.  Sometimes people find it works best if they think of it as a giant experiment to learn about themselves, their world and the financial part of it.  The experiment approach works because people in this mode do not get the idea that their work here is done.

No plan, regardless of its beauty and elegance will work and so no plan is ever finished.  Success is evolutionary and follows the questioning of two aspect.  What must work? and after something does not work, What now?

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com

The Best Measure

I came upon a map of Europe recently that was organized to show how many beers you could buy in each country with one month of minimum wage.  It reminded me of my university days.

How is it possible that a calculus text book costs three cases of beer?  Madness!

The point is that if you are going to measure anything measure in terms of your most valuable or most scarce resource.  Sometimes money, sometimes time, sometimes beer.  You will manage more effectively if you are emotionally attached to the units.

I have believed former GE CEO, Jack Welsh and an idea that he had picked up in the ’60′s, “If you cannot measure it, you cannot manage it.”  I am beginning to see things differently.

The Welsh idea falls out of work done in the ’50s  by Peter Drucker and a little later by George Odiorne.  One of the early successes with it was Hewlett-Packard.  The adaptation of Management By Objectives (MBO) lasted well into the ’70s.  Marry the objectives of each individual to the objectives of the organization and goodness will follow.  Create a mission.  Set goals.  Set sub-goals that relate to overall goals.  Match people goals with the sub-goals.  Measure.  Adjust.  Measure again. Reset goals.  And so on.  The key was measure and adjust.

MBO is not common any more.  To the point that MBO is now more commonly an acronym for Management BuyOut.  How strange.

Early strong criticism of MBO came in W. Edwards Deming’s book “Out of the Crisis.”  While being a strong advocate of checking or measuring as a way to acquire knowledge, he pointed out that it was impossible to know, in advance, what was most important.  So objectives were inherently flawed.

Old systems measure what happened and compare to some target.  Deming claims that cannot work.  “The most important things are unknown or unknowable.”  The risk is that people ended up measuring things just for the sake of measuring, or worse build objectives that are easy to measure and worst retained objectives that measured well but were not appropriate.

If your objectives are known in advance and are measurable and are never changing and the people who implement never change and the world remains the same and competitors remain predictable and there is no innovative disruption, possibly MBO would work.  But, to believe that is delusional.

In Deming’s view, managers should work at transforming systems.  Find ways to deliver quality at a lower cost.  But how?

Deming was a statistician and believed that experience was not valuable until it had been analyzed and connected to the aims of the organization.  Deming further pointed out that aims and the methods used to check are intertwined and you must address both.  An aim without a method is not helpful. A method without an aim is dangerous.  Sometimes perfectly right data is misleading.  If the limits of the measuring method are unknown, then emotionally sensitive observations will dominate.  You could, for example, pay too much attention to a customer compliant.

I think the message is that old measurement systems kept track of data, possibly information.  Deming seems to be aimed at keeping track of meaning, a much more challenging task.

Meaning Matters!

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com

Why Be Disciplined?

Yaman Saleh, founded a LinkedIn group called The Trader and while still small, I have found it to be among the more worthwhile.  You should consider joining here. 

Yaman is a polymath and has good instincts as a group manager.  One of his good instincts is that he comments on articles I publish.

Recently I published one on knowing what you mean by profit, so you can focus more effectively.  I used a farmer as an example of someone who described profit in ways not connected to money.

Yaman was kind enough to extend the thought into ways of being successful.

“The law of the farm” is a phrase Stephen Covey used. We can’t speedup or slowdown natural principles. We must adhere to them, or break ourselves against them.

The more I know about technology, the more I appreciate that principle. Seeking instant gratification, on any dimension, embeds a snowball effect.

The idea is that some things work at their own pace and they do it without regard to what you want. Farmers seem to know this and they also have non-money ways to think about profit.  The two may be connected.

Success is a goal most people have, but some try to do it while working against the natural order of things.  They fail.  As Yaman points out, break themselves against the immutable facts.

You cannot make many things happen more quickly, cheaper or easier.  Things have their own time scale and requirements.  Financial planning is a methodology that is that way.  Time and its engine, “compound interest” are crucial.

Catching up is much more difficult than starting sooner.  Cramming doesn’t work.  Like farming, you cannot make corn grow faster by yelling at it, wanting it more, or promising it some reward.

Trying to accomplish a 30 year plan in 5 years denies reality.  If you try it, you will find that you take huge risks that you would never take in a more extended period.  Penny stocks for instance.  I need a 40x my money deal, so there must be one there somewhere.  You will probably lose both the money and a significant share of the time remaining.

The thought is not a new one.  For those old enough to remember Earl Nightingale, you will recognize the similarity.

 “The only person who succeeds is the person who is progressively realizing a worthy ideal. It’s the person who says, “I’m going to become this and then progressively works toward that goal.”

Progressively is the key.  Instant success is an illusion.

According to Earl, the “day” is the building block of success.  What am I to do today to reach my thoughtful goal?  What have a learned today that will cause me to adjust that goal or its method of achievement?  What should I do tomorrow to more perfectly achieve my ultimate goal?  What mistake did I make today and what did it teach me?  Every day matters.

Seen this way, the long run is just the sum of thousands of short runs.  Each one managed and studied.

It need not be a form of martyrdom.  Earl addresses the day in another way.

“Learn to enjoy every minute of your life. Be happy now. Don’t wait for something outside of yourself to make you happy in the future.

Like the discussion on profit, discover what you value and seek more of it.  Balance.  You will do more of what you enjoy.

Eventually, and often too late, we discover that we could have done more or we could have done it differently.

“We are all self-made, but only the successful will admit it.”

“Hurry up” probably works in football because it confuses the defense.  There is no advantage to confusing yourself, so using time effectively is crucial to success.

None of this is difficult or complex.

As John Snobelin said last year, “Success is merely the ability to follow simple rules.”

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.